Software Development Contracts: Time and Materials vs Fixed Price

What kind of contract should you sign when you decide to work with a software house? Do you know the difference between the contract types used over the software industry? We tell you everything about the advantages and disadvantages here.

When it comes to choosing a software development company for your project, Time and Materials and Fixed Price are two of the most dominant options. Choosing one that provides you with the right pricing contract might be difficult, especially if you don't know what you're missing out on when your primary goal is to scale your digital product.

Let's look at the differences between Time and Material and Fixed Price contracts, their advantages and risks, and which one would be the best fit for your software, web, or mobile app development project.

What is a Time and Materials Contract?

A time and materials contract indicates that you'll be paid for your work on a daily or hourly basis.

You'll be charged for the amount of time it takes developers to complete your software, web, or app development project, measured in hours and days.

If you find yourself in any of the following situations, you might consider signing a time and material contract:

Let's take a closer look at how time and materials contracts work, as well as their advantages and disadvantages.

How do time and materials contracts work?

Simply put, a time and materials contract specifies how a company will pay a contractor for both the time they spend working on a project and the materials they use to develop the digital product. A T&M contract is ideal when the project's duration is undetermined but the labor involved is paid at a set hourly or daily rate. For example, here's how a TimePad Time and Material contract works: 



The project is split into parts so that you can see what functionalities need to be implemented and make all necessary changes or additions during the development process.
Finally, you can approve the project's estimated timeline, resources needed and costs and agree to pay for them.

Pros and cons of time and materials contract



What is a Fixed Price Contract?

Fixed product requirements and a fixed project cost characterize a fixed price agreement or lump-sum contract. Instead of charging for each individual task or hour worked, the lump-sum model requires the contractor to provide a total project fee.

For low-complexity software projects and business solutions, a fixed price works best. A fixed pricing contract is typically used in the following situations:

Pros and cons of fixed-price contract



Which one to pick?

So, in response to the question, "Which pricing model is better, Time and Materials or Fixed price?" we would say, "The T&M contract is slightly ahead of the Fixed price system due to the flexibility it provides." Regardless, they're both good. The Fixed Price pricing model is ideal if you have a small project with tight deadlines and/or an MVP. If your project is large and complex, however, and you need greater flexibility in choosing features and other details, it is advisable to choose the time and material.

We've worked with Fixed Price and Time and Material pricing models at TimePad. As a result, we believe we are qualified to compare the two pricing frameworks and advise you on which to choose.

We're used to working in the T&M model, to be honest. A Fixed Price agreement isn't out of the question if a project requires a different approach. Let's say you need to create a minimum viable product (MVP) for an app. To begin, we can use a Fixed Price approach. We can switch to a Time and Material billing model later if you are happy with the outcome of our work and need to create a full-fledged and feature-rich app.